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13.5. Other Anti-Avoidance Rules

Indonesia does not have a specific general anti-avoidance rule or related regulations. The rules and regulations are generally included in general in the Income Tax Law (ITL) which was developed based on the international principle of anti-avoidance rules.

As a civil law country, there is no court developed case for the anti-avoidance provisions, the relevant provisions are included in the law which provides general guidance of the subject. Further detailed of the subject would be further explained in the implementing regulations.

Substance over Form Principles

The ITL provides for a wide definition of income in various articles. In general, the definition of income as basis to impose tax is provided in article 4 of the ITL:

“any increase in economics capacity received by or accrued by a taxpayer from Indonesia as well as from offshore, which may be utilized for consumption or increasing the taxpayer’s wealth, in whatever name and form, including…..”

The same definition is also provided for the purpose of withholding tax  under article 23 and 26 of the ITL.

With the above wide definition, the Indonesian Tax Office (“ITO”) would have a basis to impose any tax or withholding tax which satisfied the requirements of  the income being used for consumption or increasing the taxpayer’s wealth.

Use of Special Purpose Company (SPC)

The ITL has also several provisions in relation to the use of SPCs. These provisions are intended to challenge any structure intended to avoid any tax in Indonesia.

Article 18(3b) of the ITL:

“A Taxpayer who purchases shares or assets of another entity through a special purpose company can be deemed as the real party who conducts the transaction, provided that such taxpayer is the affiliation of the special purpose company, and the price of the transaction is unfairly settled.”

This provision extends the Indonesian right to impose tax, if an Indonesian resident uses an offshore SPC to sell its investment in Indonesia, whilst this SPC would be later transferred to the final buyer. Though the transaction would be executed in Indonesia, provided the SPC is an affiliated entity, the capital gain under this provision may be subject to tax in Indonesia.

Article 18 (3c) of the ITL:

“The sale or transfer of shares of a conduit company or special purpose company which is established or domiciled in tax haven countries and the conduit company or the special purpose company is the affiliation of an entity established or domiciled in Indonesia or a permanent establishment in Indonesia, could be deemed as the sale or transfer of shares of an entity that is established or domiciled in Indonesia or of a permanent establishment in Indonesia.”

The sale of shares of a conduit or special purpose company established in a tax haven country which has a special relationship with a company or permanent establishment in Indonesia may be deemed as a sale or transfer of shares in the Indonesian company or permanent establishment. The ITL does not define tax haven, but we would assume that the ITO refers to the provision under the Annual Income Tax Return Manual, where tax haven is defined as a country whose corporate income tax rate is 50% or more lower than the Indonesian rate.  Currently, the corporate income tax rate is 22%.

If a foreign investor holds shares in an Indonesian company through an intermediary holding company located in tax haven, and is a conduit company with no substance, when it sells its investment in Indonesia to an acquirer, it may be treated for tax purposes as if itself had sold shares in an Indonesian company. A 5% withholding tax would be payable.